Tuesday, 31 December 2013

New Year's Resolutions

This time last year I was suffering from persistent pain just under my ribs on the right hand side that was initially diagnosed as gallstones on 2 January, the presence of stones was confirmed by an ultrasound later in the month. I then went through two more months of pain because the NHS consultant did not believe I had gallstones, statistically I was too young and not fat enough to be troubled by stones, ignoring the prior probability was not being updated with the information that I had pain centered on my gall-bladder. Eventually I was admitted to hospital with jaundice and an infected gall-bladder. A few months later my father-in-law was diagnosed with depression, in September, following mild paralysis they realised his mood change was a consequence of a brain-tumor, my father-in-law died on 26 December. I learnt, as much of the British public have come to realise, the NHS is not as perfect as we like to think.

While in hospital, on morphine, it struck me that I should look into Pragmatism. Donald MacKenzie had mentioned Pragmatism in 2012 and I was aware Poincare was linked to the philosophy, but I did not really understand it why should I as a mathematician? I spent the 8 weeks recovering and then most on June-July reading up on the topic. Pragmatism enabled me, as an atheist, to reconcile Virtue Ethics with Financial Economics and I drafted my paper Reciprocity as the Foundation of Financial Economics. This was a significant silver lining to the cloud of being in pain for three months.

In August I met Brett Scott (@Suitpossum) who, like me, was speaking at the Edinburgh Fringe's Cabaret of Dangeous Ideas. It was good to meet Brett, who I admire greatly. He was able to make explicit (for me) that there was an issue around mathematics obscuring, rather than enlightening, finance, and since we met this has become an increasingly important issue for me. I also came to believe that, while Brett and I agree on many issues, our difference is he has a fundamental concern with scarcity while I have a fundamental concern with uncertainty. Later in the month I was interviewed by David Fergusson at the Cabaret of Dangeous Ideas. It was helpful for me that David saw some merit in the work I was doing, and we might collaborate on the relationship between science and religion in the future. David recommended that I read After Virtue, which I am still in the process of completing, but I have read the "students' guide". Following on from my meeting with David I met Paolo Quattrone and Michael Northcott and discussed issues relating to re-orienting finance. Michael, as an Episcopalian, made some comments about how time is irrelevant in the Christian context but dominates finance, this seemed to link to Brett's views rooted in deep ecology. I have thought a lot in the past about the relationship between randomness and time.

As well as these face-to-face interactions, Arthur Charpentier (@freakonometrics) is my modal "Favorite" on Twitter while Noah Smith (@Noahpinion) has prompted many of my blog posts. Thanks go to Jon Harris (@jonone100) and Dave Marsay for useful comments on my blog and thanks to Mark Thoma (@MarkThoma / economistsview.typepad.com) for disseminating my posts.

In the latter quarter of the year, with the REF mayhem out of the way, I began to look forward to where my research should focus. In April the IMA conference on Mathematics in Finance had taken place, with me as the (ill) Chair of the organising committee. The Bank of England had provided input into the organisation of the meeting and they had highlighted the need for mathematicians to shift their perspective away from stochastic calculus and re-focus from micro- to macro-economic issues, as in Size and complexity in model financial systems, and address the concerns that would be identified in para. 89 of v. II of Changing Banking for Good, that mathematics aids 'insincerity' in financial practice. A bit later, around November 2012, Kenneth Lloyd, a software engineer responded to my piece Ethics and Finance: The Role of Mathematics and asked whether I had ever considered modelling financial networks based on reciprocity and profit maximisation and work out which would be "better". Finally I have been following the emergent phenomena of peer-to-peer lending and crowdfunding, being an investor this year in Harlaw Hydro, a crowdfunded community energy project.

As a result of these interactions I will be looking to follow up on Kenneth's suggestion and is to investigate whether financial systems are more or less resilient and effective if based on different commercial cultures, e.g.: profit/loss sharing (Islamic musharakah), if loan interest is based purely on objective risk born by lender (Scholastic usury prohibition), if the interest rate is determined by the opportunity cost (market based) or if interest aims to maximise returns to the lender. I intend to model financial systems as graphs and study how the different commercial cultures affect the evolution of the graph topology, and then how money/credit is transmitted on different graph topologies. Effectiveness will be measured by the efficiency in enabling lending and resilience by the ability of a financial network to withstand shocks generated by losses. This research question addresses an issue moral philosophy: what is the relationship between ethics and the structure of the polis and is motivated by themes in Pragmatic philosophy, in particular the hypothesis reciprocity emerges as a social norm to enable resilient and effective communities were exchange is important. The different commercial cultures can be seen as representing points on a spectrum of commercial attitudes and in cultures where there are low interest rates the hypothesis is that there will be greater homophily between the agents in the network, and this will create more resilient and effective financial networks. The research will aim to inform regulators of any intrinsic merits with emerging financial mechanisms, particularly crowdfunding and peer-to-peer lending, particularly as there is concern that the regulators will stifle the democratisation of finance.

If anyone is interested in being involved in this project, please do get in touch.

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About Me

I am a Lecturer in Financial Mathematics at Heriot-Watt University in Edinburgh. Heriot-Watt was the first UK university to offer degrees in Actuarial Science and Financial Mathematics and is a leading UK research centre in the fields.

Between 2006-2011 I was the UK Research Council's Academic Fellow in Financial Mathematics and was involved in informing policy makers of mathematical aspects of the Credit Crisis.